Stock Analysis – Price to Earnings Growth, Debt to Asset Ratio, & Dividend Yield

August 14, 2009

Stock Analysis Series

In the first stock analysis article, I covered two of the most popular analytical measurements investors use to gauge the health of a particular stock, earnings per share and price to earnings ratio. These are certainly not the only measurements you should use to evaluate a company’s stock; today I’ll take a look at three more tools for your investor toolbox.  These tools are not used in every scenario but it is good to know what they are and how they are used.

Price to Earnings Growth (PEG)

The PEG is an indicator that was made popular by Peter Lynch (Fidelity Magellan Fund). It is used extensively now and some investors favor it over the P/E due to the fact that it takes into account the growth of the stock.

PEG = Price to Earnings Ratio/Earnings Per Share

Like the PE, the lower the PEG, the more undervalued the stock and vice versa. There are issues with this analytic measurement though. The number is based on projections and can be widely inaccurate. One other issue is that it is not always clear when published if past EPS or projected EPS is used.

This measurement should really only be used on growth stocks. A stock that is well established and pays a considerable dividend will most likely have a low PEG, but still be more than suitable as an investment.

Debt to Asset Ratio

This one is pretty straight forward. It shows how much of a company is financed by debt.

Debt to Asset Ratio = Total Liabilities/Total Assets

The lower the ratio, the more the company is financed by its equity. This is a sign of stability. The higher the number, the more “leveraged” the company. We have all seen in the recent past the dangers of being highly leveraged both as a company and as an individual.

Dividend Yield

While you would use the PEG above to find growth stocks, the Dividend Yield is usually used for value stocks with lower growth potential. The growth in these stocks doesn’t necessarily come from the stock price. It is created by the dividend that is paid. Investors can choose to re-invest those dividends to purchase more shares of the stock or take the cash (either way, taxes are paid the year the dividend is distributed).

Dividend Yield = Dividends Per Share (last 12 months)/Current Price Per Share

If a stock is trading at $30.00 and issues a quarterly dividend of $.25 (totally $1.00 annually), the Dividend Yield would be 3.33% for that stock.  This measurement is extremely important for those who are looking to create some income from their investments without actually selling their stock.

Hopefully the next time you look at a stock’s fact sheet, some of those numbers and symbols will make a bit more sense to you. Next up in the stock analysis series I’ll go over price to book ratio (P/B), beta, and price to sales ratio (P/S). If there are any ratios or other fundamental analysis tools I haven’t covered that you’re curious about, leave a comment below and I’ll cover them.


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